Wellington Airport: a factual high level summary

This morning’s Dominion-Post features a full page advert, notionally inviting people to make submissions on the resource consent application to extend the runway at Wellington Airport.

In fact, the advert is mainly an opportunity to tout the case for the hugely-expensive proposed extension – in what must be one of the most expensive locations in the world in which one could add 300 metres to a runway (and still not comfortably meet international safety guidelines). The pretty graphic highlights 20 Pacific Rim cities which planes could reach from Wellington – without ever mentioning that the most likely outcome, if the project succeeds at all, is flights once or twice a week to one or two of them.

All one really needs to know about the proposal is that the owners of the airport think the project is sufficiently unattractive that there is no way they would proceed with the extension if it involved investing their own money.

The owners – WIAL, majority-owned by Infratil – have been quite clear that the project will only proceed, even if it gets resource consent, if there is a massive public subsidy – huge contributions from some combination of local, regional, and central government that would not be reflected in a commensurate ownership interest in the airport. But there is no mention, at all, of this fact.

In a little note at the bottom of the advert it is described as a “high level factual summary of some of key effects from the extension”. I did spot the odd fact in the advert, but mostly it was boosterish opinions, clothed in consultants’ reports – and all summarized in the huge alleged national benefit estimates. I’m deeply unconvinced by the economic case for this airport runway extension – the benefits appear to be overstated, and the discount rate used to evaluate them seems too low – but would have no real objection if private shareholders were paying for it. But they aren’t.

I wrote a few posts about this proposal late last year, here, here, and here. Ian Harrison, at Tailrisk, has a nice piece here on the same issue.

I’m not making a submission. As a matter of principle, I don’t think the Resource Management Act should be used to block business developments, unless there are compelling environmental grounds – and I have no expertise in environmental issues, and am interested only to the extent Lyall Bay remains a pleasant spot for the family to swim.

The real debate should be around decisions new local and regional councilors consider making about injecting public subsidies to this operation (over and above what has already been spent). The quality of public sector investment spending is typically quite poor, and around the country airport investments (see eg Rotorua) are no exception. As the local body elections are just weeks away, the focus needs to be on the attitude towards the project that each candidate takes. So much money is involved, and attitudes to this project seem to reveal so much about candidates’ views on the role of local and regional government, that for me it will be a defining issue. I will be seeking out candidates who are clearly opposed to spending public money on the extension. In the huge field of mayoral candidates there appear to be a couple of options – but their fine print needs checking out. I haven’t yet done my research on the council and regional council candidates. I encourage greater Wellington readers – because although the Wellington City Council has been driving this, they’ll be looking for money from other local authorities in the region – to prioritise this issue.

My fear is that once the election is over, there will be a behind-closed-doors process rushed through, with no rigorous evaluation of the economics of the project. Cheer-leading from the local business community – always keen on the sort of public subsidies and activities that don’t face the market test that keep Wellington afloat – reinforces the risk.

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29 thoughts on “Wellington Airport: a factual high level summary”

Infratil state very clearly on their website that compound after tax returns to shareholders has been 17.95% per annum. These returns are made in heavily regulated industries where positive economic returns are more or less guaranteed by the regulator. They must have seen Mayoral candidate Justin Lester coming a mile off – a politician who seeks votes, and can get those from uninformed voters by promising to spend other people’s money. Of course, if elected he will also be the politician on the other side of the table when the question of payment for the airport extension comes up. Just like he was when “negotiating” with Singapore Airlines for their >$800,000 per annum subsidy. Infratil want the public purse to fund 100% of the extension, but I doubt that Infratil will be willing to forego any of the increased landing charges and other revenues from the international flights (if they come).

Is there any wonder that Tim Brown, executive at Infratil, Chair of the Board of Wellington Airport and also a commenter on this blog appears prominently on Lester’s campaign video (https://www.youtube.com/watch?v=qDUJNE35cJQ) endorsing him?

There are some pretty expensive billboards up all over town as well. Lester must have been selling a lot of takeaways at his part-owned shop lately (although not enough to pay all his staff the “living wage”).

The entire purpose of selling the Wellington airport to a private stakeholder is for that private stakeholder to take on the risk of the Wellington airport. If Infratil expects the taxpayer and the Wellington ratepayer to take the risk then they must return sufficient shares to the taxpayer and the ratepayer for that risk capital invested. It is incredible that they are asking the taxpayer and the ratepayer to gift $300 million to subsidise their profits.

Michael
To comment first on the main point in your blog; that Councillors (City and Regional) are not to be trusted and that you intend to ferret out and comment on their willingness to invest ratepayer funds in the extension.
I hope that the councillors you ask say “its too soon to say”.
Wellington City’s position on this project is, in my view, a good one. In a nutshell they were willing to spend $3 million on a process to see if the project is viable. Viable as regards consents and viable as regards economics. Once they have the information they will make the decision about investing further.
One Councillor has been negative from day one (Helene Ritchie, I’m sure she would welcome your endorsement) and the three Green Councillors (Free, Pannett, Lee) voted yes then no.
In my opinion it would reflect poorly on any councillor who voted to spend $3 million on a study and then decided “no” even before that study was concluded. So if you do find anyone in that category, I hope you grill them on why they were willing to spend the $3 million.
I suspect that outside of Helene you are on a lose/lose campaign. they will either say “too soon to say” or if they say “no” they will be indicating a very cavalier attitude to $3m of ratepayer funds.

On your summary of the project. Regrettably you are showing every symptom of having a closed mind, in particular by being parsimonious with the facts. When you choose to short circuit “the whole truth” it makes whatever version of logic you claim to apply someone what doubtful. Lets look at your assertions and the facts:
1. It is hugely expensive.
Really? Wellington City Council paid $21.5 million for a half hectare site on which it intends to build the convention centre. The land reclaimed for the runway will cost about 50% of this on a per square metre basis. Auckland Airport’s second runway will cost in the vicinity of $500 million. Before responding that what Wellington City Council is willing to pay is not a good indicator of value, have a look at land values in Mt Victoria. They are also in the $30-40 million a hectare range, ie about twice the cost of Lyall Bay reclamation.
2. The runway does not “comfortably meet international safety guidelines”.
To be succinct, that snide remark is crap. The runway meets ICAO standards, as verified by the NZ Civil Aviation Authority. Every airline that uses it undertakes its own checks and makes its own decisions. The CAA recent affirmation of the runway safety has been confirmed in the High Court. A part of the statistical evidence accepted by the Court indicated a probability of 1 accident per 745 years due to the runway length. It has the same runway safety length features as Queenstown and other NZ international airports.
3. If the project succeeds it will give rise to one or two long haul flights a week.
Where did you dream that up from? Given your interest in immigration statistics I’m surprised you have missed the massive recent surge in international traffic arriving in New Zealand. In the year to 30 June 2016, 1,792,416 people visited NZ from long haul sources, that was an increase of 231,568 people on the prior year. 21% more people from Asia, 9% more from Europe and 10% from other sources. A daily long haul service requires about 40,000 inbound passengers a year.
Of course, maybe Wellington really is such a hole that no one will want to come here, but I recently visited Singapore to talk to the airline people behind the new service that is to link Singapore-Canberra-Wellington and I have no doubt that (a) they have done their homework about demand, and (b) they are looking at increasing the four times a week service to daily as soon as aircraft are available.
The InterVistas analysis of likely runway use available on the Airport website is both conservative and convincing. And today traffic to New Zealand is growing much faster than in the InterVistas base case.
All the evidence is that Wellington with a longer runway would capture a good share of that growth.
Note also. Inbound tourists spend roughly half their time/money south of Taupo, that is to say closer to Wellington than to Auckland.
4. You claim that the owners of the airport think the project is so unattractive they will not invest their own money in the extension.
That is pure garbage. The Airport Company, supported by Infratil, has indicated it will invest in the extension and will take a risk that it attracts services. What both have said is that the commercial investment is unlikely to cover the cost. For that reason Council has indicated that it could be willing to provide funding if it turns out that there is a benefit to Wellington which is not captured by the airport’s commercial income. A somewhat similar position has been adopted by Government.
Note that a daily service carrying 110 inbound visitors (and a similar number of returning New Zealanders) will generate about $150 million of spending in New Zealand. The Airport’s total revenue from such a service (inbound, outbound, visitors, Kiwis) will be about $3 million a year, whereas government tax revenue will be in the order of $35 million and the increase in GDP will be circa $75 million.
5. You are unconvinced by the economic case. Sapere were used to provide the economic modelling.
They were selected because they are the best equipped people to undertake this work in New Zealand. AirNZ, acting through BARNZ, has engaged other economic consultants to critique the Sapere analysis. In due course the various economic gurus will have their day in court. We will not die wondering who is correct.
But I really do applaud your principled decision to not make an economic submission on an environmental consent. It is nothing short of bizarre that 99% of the opposition to the extension has been focussed on the economic or commercial factors and about 1% on the environment (is it something about economists?).

Positively for you, my understanding is that the extension and the associated “wave focusing structure” will be good for those who like to swim and surf in Lyall Bay.
Tim Brown

Re the councilors, you may well be right. I wasn’t intending to grill them individually but to look at their campaign literature etc. As a voter I will have to make a judgement about which candidates are most likely to vote no in the end.

I won’t respond to your other points in detail – many are probably differences of emphasis as much as anything or cover ground we’ve debated previously.

On the investment proposition, I’ve been very careful through this whole exercise not to criticize Infratil. You are a private company pursuing the best interests of your shareholder, and good luck to you. But you took exception to my comments thus

“You claim that the owners of the airport think the project is so unattractive they will not invest their own money in the extension.
That is pure garbage. The Airport Company, supported by Infratil, has indicated it will invest in the extension and will take a risk that it attracts services. What both have said is that the commercial investment is unlikely to cover the cost”

I certainly wasn’t suggesting WIAL/Infratil was putting nothing in. My bottom line point is exactly the one in your final sentence. As a commercial project, this isn’t viable. It will proceed, subject to resource consent, only if it gets a (considerable) public subsidy. Government entities offering subsidies (and private entities seeking subsidies) always come up with estimates of external benefits – sometimes they are even really there – but from the perspective of the commercial organization, WIAL, it will be a subsidy, just as certainly as the film grants/tax concessions are subsidies (and many even think them a reasonable use of public money).

Michael, you may wish to consider submitting at this stage. Whoever hears this application will have to balance the economic and other benefits against environmental impact. All fine and dandy.

The problem that arises is what happens next. In the general scheme of things I would expect WCC as the other shareholder to have to put any funding proposal out to the public for consultation – which of course would be the logical time for an economist to challenge the value of the proposed investment.

But they have already introduced economic arguments as part of this application. That fact could alter (i) whether they feel that another consultation is warranted – the LGA allows them to consider whether they already know what the community’s views are; and (ii) will certainly give them an ability to ignore inconvenient submissions if they do go out to the public.

WCC take my breath away for the cavalier approach they take to their responsibilities under the LGA so, stupid though it may seem, now might be the best time to marshal counter-arguments.

Fair points Donald. I’m probably some sort of naïve idealist, but I’d be fairly deeply ambivalent about the project not proceeding because it couldn’t get a resource consent, whereas if the public voted for enough people who were skeptical of the substantive economic merits of the proposal, and it could no longer command support at WCC (or the other councils) any I’d longer, that would be unambiguously satisfying.

I was interested to see Tim Brown’s comments about the value of the land around the airport. Let’s use the $40m/h figure. The airport is 110h, apparently, so the land value is worth $4.4b. And apparently the $300m extension would apparently be worth another $600m from the figures that Tim gives.

I have an alternative idea. Why not reclaim the land and build a brand new airport somewhere more suitable? The $5b value of the airport would pay for a pretty good new airport, if the runway would only cost $500m, that would leave $4.5b for terminal, infrastructure etc. I would have thought that was achievable.

A better located airport would also improve access from Porirua, Hutt Valley and the rest of the lower North Island.

Of course the hard part is finding a suitable site. I wonder if there might be an opportunity north of Pauahatanui Inlet, next to the new Transmission Gulley route, also with access to the Hutt Valley via SH58.

I realise it is silly to respond to twerps who make inane inaccurate remarks and hide behind pseudonyms, but here goes.
1. Infratil has not produced its returns by ripping off regulated industries. Infratil has generated total returns for its shareholders of $2,632 million over the last 22.5 years (for its shareholders who are 76% NZ resident and 46% retail (as opposed to institutional or corporate)). The majority of Infratil’s returns have been created from managing business where it has acquired the shareholdings from offshore interests. Port Tauranga from Malaysians. Trustpower from US and Australians. Z Energy and NZ Bus from the British. Even Wellington Airport which was acquired from the Crown via a contested process had offshore under bidders. The main second stand of wealth creation has come from applying expertise built up in NZ to Australian opportunities such as energy retailing and renewable generation. Infratil has a wealth creation record it can be proud of. If Infratil had not existed NZ-inc would have been a lot poorer.
2. When you are in the sort of businesses that Infratil’ is in, which provide crucial services to their communities, it is important to both get on with those communities and also to remain disciplined. Infratil has good relations with its co-shareholder in Wellington Airport and the Airport invests heavily in supporting its community (It would not surprise me if the Airport was the largest commercial sponsor of the arts in Wellington, via Wow, Arts Festival, etc). Wellington Airport also has the lowest aeronautical charges per passenger of any international airport in Australasia and the lowest costs per passenger. Its dividends to Council amount to approximately $135 per household. In fact over the last decade, Wellington City Council has received more dividend income from its 34% interest in Wellington Airport than Christchurch City Council has received from its 75% shareholding in Christchurch Airport.
Wellington Airport is a gateway that Wellingtonians can be proud of, it invests heavily in better air connectivity, it is very efficient and low-cost, and it provides a good return to its shareholders including Wellington ratepayers.
3. I did appear in a video giving my opinion of Justin Lester. I also told Celia Wade-Brown, Jo Coughlan and Nicola Young that I’d be happy giving my opinion about them if they wanted them. Ive admired the contribution of each of those individuals to Wellington. Celia has steered council to support an excellent economic growth plan and is a good chair. Jo has managed Council’s critical economic committee very effectively. Nicola has tirelessly worked on central city issues and for the arts. Neither Infratil, Morrison & Co, or Wellington Airport has made any political donations or provided any support for any individual seeking office in Wellington.
Tim Brown

As a successful capitalist Mr Brown, you would surely understand that individuals are motivated by economic incentives. In this case, the incentives on Justin Lester are not aligned with providing an outcome that provides the most value for residents of Wellington who directly or indirectly (via rent) pay rates and who will underwrite an investment where the measurable benefits are internalised to the airport (66% owned by your company). In fact, Lester’s incentives align very much with Infratil’s interests. As such, your appearance on the campaign video has at the very least the appearance of impropriety.

Expensive newspaper advertisements and signs up all over the airport and surrounds attempting to influence people during an election campaign for me add up to an attempt to use the political process to advance private interests.

Like Michael I wasn’t going to make a submission. But prompted by Tim Brown’s abusive ” twerps” and “inane” comments I will now.

BTW i am the author of the Tailrisk Economics report referenced by Michael.

i made the comment
“The study shows that the benefits to Wellington airport are $317 million and the costs $378 million, so only a modest increase in airport charges, which would be passed on in fares and freight charges, would more than suffice to meet Wellington Airport‘s hurdle rate of return. If Wellington Airport believes its own numbers then they will extend the airport without any central or local goverment subsidy.”

One difficulty not commented on here is that putative airline routes to airport X from overseas airport Y come and go. Proposing that this one and that one will come if we build it is not the same as saying what happens a few years later when passengers stop wanting to come to Wellington (because preferring to visit another country, because preferring to land in NZ in Queenstown etc). I write this from Christchurch where over the years “regular [daily/weekly] flights” have started, continued for a while and then stopped never to be heard of again. Wait, sometimes they restart, continue and then stop when, once again, the numbers drop away.

A couple of further points in response:
1. Where should Wellington’s airport be located?
If you have a look at the Infratil website you will see a report we did on the extension project in September 2014. It includes a map of 17 sites looked at back in the 1930s. Over the last few years we have received a steady flow of suggestions. All have very major impediments. The current site is a lot better than any alternative, and there is no alternative that has not been very thoroughly reviewed at some point.
2. What is WIA’s land worth?
The Airport occupies 110 hectares of which about 90 is aeronautical, 10 is under passenger facilities (eg. car park), and 10 is in commercial use (eg the retail centre to the west). The aeronautical land value is set by a process defined by the Commerce Commission and is about $120 million, so about $1.35m/hectare.
This is a point of contention between airport and commission. The land under the runway extension (cost circa $20m/hectare) will have a value in the airport company’s accounts which it is hard to estimate without a great deal of research that has not yet occurred.
3. Local body politicians
Wellington City Council seeks to have Wellington develop to provide the best possible quality of life for its residents. This includes all manner of liveability factors, environmental, social, cultural and sporting, etc, along with infrastructural and economic. Some councillors are clearly champions of one of two areas. Some take a more general interest. Councillors aren’t monks. Good councillors are highly engaged with their community in lots of ways. As for their individual marketing to the electorate? How else do we get to know who they are and what they offer? Wellington has New Zealand’s most highly educated (over 40% of the population have tertiary qualifications) and well paid population. These are the defining characteristic of Wellington; far more than hills, wind, etc. How should Council build on this attribute? It works with the tertiary institutions, it facilitates business incubators, and it works with established companies. These are things it does do and it should do. Not every councillor is engaged with this programme, several don’t and at least a couple seem to have a different vision. Its your call when you vote as to which Wellington you want. Personally I hope it builds on the talents of its people and in three years has even more well educated people earning good money.
Tim Brown

What about the effects of climate change and rising sea levels? Sure does not make any sense to be throwing away $300 million in a airport that you might have to shift in the next 10 years from coastal erosion or rising insurance premiums?

They sound like reasonable points in principle, but they are beyond my area of expertise. From what I’ve read, I’d have thought problems were rather more than a decade away (I certainly hope so having urged the WCC to get on and fix the seawall in Island Bay, which may eventually face the same problem – but which even the Green councilor noted “but not in the next decade”)

That’s where the problem lies. No one actually know the climate change effect but we do know that coastal quite severe erosion is occurring all around the NZ coasts over the last 10 years. The problem is that the insurance industry will respond alot earlier to cover the risk of increasing issues relating to climate change. This conversation is already happening with banks and with insurance companies and clearly they treat the climate change issue very very seriously.

Hi Tim, I couldn’t find the report you mention that has a map of the 17 options, I could only find the Infratil Update Newsletter from Sep 2014. I would be interested to read if you can be more specific about what and where it is.

Infratil stands to make a handsome gain here regardless of whether or not the runway extension has any utility at all.

Wouldn’t a fair way to solve this issue be to ask the Commerce Commission to indicate what the dictated increased landing charges associated with the capital expenditure of the runway extension will be, and then use these discounted future cash flows in order to determine the minimum additional capital value that the extension will provide to airport shareholders, and then infratil pay their share (2/3rds) of that?

Obviously Infratil wants to get as much free money as possible from the ratepayers, but if they don’t at least offer this as a minimum, they are completely and utterly taking the piss, and you should all be ashamed of yourselves.

Clearly Aucklanders do not want a expanded port in their harbour made up largely of carparks with a low investment return. The port sits on very valuable land and pay very little rates. The new Commercial Bay(downtown shopping mall) development occuring right now demonstrates that the waterfront makes a lot more money for the Auckland Council. Commercial Bay will house 10,000 extra people living and working in Auckland CBD.

Can you imagine if a private enterprise like the Commercial Bay development were to ask the government for a big gift handout of $370 million just because 10,000 workers will pay GST in the local shops each and every day of every year and PAYE on their salaries. Infratil is acting beyond belief as a private company.

First an a point of clarification. My “inane twerp” designation was aimed only at those who hide behind anonymity while dishing the dirt.
Second, some website directions. The Infratil newsletter which provides a map of where airport sites have been contemplated is on the web site at https://infratil.com/assets/imported/nzx/Infratil-Update-Newsletter-September-2014-200319.pdf
Third, another point of clarification about the nature of investment. It involves risk. One risk you take when you invest in an airport is that airlines and passengers wont turn up or will stop using it. Wellington Airport has no income certainty from airlines or passengers. It has no contract with any airline that they will use it tomorrow. Today the Airport would be worth (probably) over $1 billion, yet all the value rests on the risk that AirNZ, Qantas, Fijian, SoundsAir, etc continue to use it. That is the nature of the business. Airlines do not provide certainty of capacity. Just as no airline provides certainty for the existing business, nor is there any prospect of an airline providing an underwrite of the extension.

Ive read several articles written over the years about Wellington Airport’s development. One by Duncan Campbell in 1970 starts with this line “Wellington may well have the world’s most argued about airport.” and after explaining what they have been since the 1920s, he finishes with “So the airport argument continues as it has for 50 years. What Wellingtonians will find to talk about if ever the issue is satisfactorily resolved is a matter for speculation.”
Tim Brown

We all want Wellington to be a vibrant and sustainable city and I am not against the airport in principle. But WIAL’s comments and these latest ads still seem to have left a lot of detail out.

Why won’t WIAL foot the entire bill? If the outcomes will be as you promise, the Wellington community will feel the benefits anyway and the Airport will get its ROI, and the City Council will get its dividend without having to have put such a large amount of corporate welfare in the form of both ratepayer and taxpayer money in and carry the risk. What factors have the dictated the ‘cap’ on your commercial investment?

As you acknowledge, a return relies on airlines/visitors actually using the extension, both for the Airport and the ratepayers. But it does not detract from the fact that the extended runway adds a substantial physical asset to the Airport’s portfolio. As the majority shareholder, Infratil stands to benefit the most from this. Why do you think it is fair the ratepayers take the risk with zero guaranteed return?

You mention one daily flight of 110 people will generate about $150 million of spending in New Zealand. What flights have you secured to fulfil this/ or which airlines have shown significant interest? How is the Singapore-Canberra-Wellington route actually doing in terms of loading? And how much of a subsidy is WIAL currently giving Singapore Airlines to fly in and for how long? These are all questions that are material to confirming the benefits you are touting will actually eventuate?

Why has WIAL chosen not to fully answer the 46 questions that Wellington Regional Council put to you as a means of getting the kind of detail that the public deserves before putting our own money into this?

And finally, can you tell us whether any of the $3 million ratepayer money that you have already been given by the Council has gone into the ads that were in the paper this week? The DomPost ads alone would have been about $36,000 + GST? And yet there has been no option for any questions to be answered in any meaningful way?

We look forward to your answers and to our mayoral hopefuls and councillors scrutinising this proposal as we would hope they would

I am actually quite shocked that Wellington Council has agreed to spend ratepayers funds to the tune of $3 million. Infratil should have incurred the cost and completed the study with a Q&A session with the ratepayers. This is primarily a privatised airport. An offer of shares to the government and the ratepayers must be made in exchange for the investment dollars.